Forget trade wars, the real US-China clash is a tech war

This matters a great deal for tomorrow’s economic and military battles

Chinese President Xi Jinping with US President Donald Trump outside the Great Hall of the People in Beijing last year. Photo: Li Tao/Xinhua News Agency/PA Images

The risk of a trade war between the United States and China is real enough, reflected in financial market reactions last week. For the moment though what we are seeing is skirmishes, not war, and one imagines there will at least be attempts at bilateral talks before things get much worse.

Still, there is one aspect of last week’s developments that merits particular attention. And that is the tech war, rather than the trade war.

It is no accident that President Trump’s move for 25 per cent tariffs on $50bn of Chinese imports has focused on the ten sectors that China made top priority in the industrial policy strategy document Made in China 2025, adopted in 2015. These sectors include information technology, robotics, aerospace equipment, ocean engineering equipment, new energy vehicles and medicine. Since then, China has adopted several policy strategies designed to make it a world leader in artificial intelligence, quantum computingand communications over the next 10-20 years.

There is no question that the US has been shaken up by China’s rise for some time, but it has taken until now for the White House to call out the threat. Chinese competition in consumer products is one thing, but in tech, America’s backyard, it’s something else. President Trump is not wrong to be concerned. The White House certainly wants to secure a short-term trade advantage over China, but the more fundamental objective is to try and squeeze it in areas forming the core of its industrial strategy. Along with tariff announcements last week, President Trump referred to the World Trade Organisation dispute about Chinese technology licensing practices.

In effect a huge divergence is opening up between China and the west across the technological universe, which matters a great deal for tomorrow’s economic and military power. It is a battle between China’s experiment with digital authoritarianism and the west’s more traditional experience of private sector technology with a public encouragement. In China the Communist Party is ramping up state support and financing for technology, in close partnership with its own tech giants such as Tencent, Baidu, Alibaba, Huawei and Xiaomi but also smaller companies and start-ups. It is going all-out to develop and integrate AI, 5G networks, big data, the internet of things,cloud computing, and the creation of new science parks and laboratories. A market of 1.3bn people, and the absence of western style privacy laws make for compelling advantages.

“Collaboration is increasingly overshadowed by rivalry”

The ubiquitous opining about China’s technological capacity and status is often self-serving, and sometimes a view out of our western bunker, so to speak. But there is no doubt that in important areas China is innovating, and not just adapting existing technology. It is catching up. Eric Schmidt, Chairman of Alphabet, the company that owns Google, has said for example that the future will belong to the countries that can surf the tidal wave of AI, and that while Chinese efforts appear up to the challenge, the US seems to be going in the wrong direction.

The reality is hard to pinpoint but a sense of proportion is always important. The US National Science Foundation, for example, said in its 2018 report that while the US maintains a lead in R&D, venture capital, most advanced degrees and production of high tech manufacturing, its lead is slipping in other important areas. The US is still overall ahead in AI technology, but Baidu, for example, is one of the top global firms in speech recognition. China was a good second to the US in R&D spending, and accounted for about half the US share of global venture capital investment and of knowledge and technology-intensive services provided to businesses.

China’s bachelor degrees in science and engineering have surged in recent years but it still lags the US in doctoral degrees. China may be making big strides, but it still faces limitations.

US and Chinese tech firms do work together. Facebook has a tie-up with Chinese phone manufacturer Xiaomi for virtual reality headsets. Apple, which has had to establish a big data storage facility in China, is developing a relationship with Guizhou-Cloud Big Data for storage of photos and messages. Telecoms giant Huawei and Ant Financial, an affiliate of Alibaba Holdings, have agreements with western companies. But collaboration is increasingly overshadowed by rivalry, and more hostile behaviour.

“Modern technologies are emerging in China and the west in two parallel universes”

For several years now, US and European Union firms with operations in China have become increasingly restive about China’s commercial, but in particular technology-related, policies. Their governments are now listening more closely. Chinese companies receive very favourable treatment relative to foreign competitors. They benefit from an array of public policy tools and instruments, including financial, interest rate and tax benefits, favourable technological standards, advantageous competition and procurement conditions, beneficial market access for domestic producers and special treatment regarding investment, trade and intellectual property rights.

What irks the west in particular is not only the piracy and plagiarism that is rampant in tech in China, but the long-standing requirement that western firms “hand over” in some form their technological know-how as the price of being allowed to do business.

Moreover, in China new cybersecurity laws enacted in 2017 place restrictions over the operations of foreign tech firms working in China, while in the US and EU, there is growing scrutiny over the investments of Chinese tech firms, and the consequences of new privacy and data regulations. The US has blocked several high profile acquisitions or equity participations by Chinese and other companies in US technology, where the competitive position of US firms could be threatened. The EU is also getting increasingly restive about Chinese activity in EU technology firms. Its recently launched General Data Protection Regulation to protect and empower all EU citizens’ data privacy means that non-EU countries, such as China, will have to align with EU data provisions or else risk being shut out of one of the world’s richest markets.

Modern technologies are emerging in China and the west in two parallel universes. China’s digital authoritarianism and surveillance state is being driven by the Party behind a wall of censorship, while western values are repressed. We may have our own issues with data privacy and the competition-choking policies of our own tech giants, but we still believe that those western values are the key to eventual success in new technology.

That China can achieve science and engineering success is no longer in doubt. After all, the USSR did. Last week the US confirmed, though, that it does not willingly want to be complicit. The tech war, if not trade war, has begun.

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